Insurers' IT spending spree

IT spending by property/casualty insurers will increase at a healthy rate, with much of the emphasis on e-commerce and claims processing technology, according to recent projections from TowerGroup.The Needham, Mass.-based consulting and research firm projects that IT spending will rise from $12 billion this year to $13.8 billion by 2003. That represents a compound annual growth rate of 5.3% for 2001 and 4.6% from 2001 to 2003.

TowerGroup projects that the largest spending growth will take place in technology supporting sales and marketing and claims processing, both of which are expected to have a compound annual growth rate of 6.1% through 2003. Included within sales and marketing is e-commerce.

Insurers are putting more money into claims administration systems because new technologies are enabling insurers to automate structured data, such as texts and pictures, that are central to the claims administration process, says Richard Roby, director of insurance research for TowerGroup.

TowerGroup projects that the smallest increase in IT spending over the next three years will be for policy administration, where a 2% compound annual growth rate is expected. Policy administration currently is the largest recipient of insurers' IT dollars; TowerGroup expects that $5.13 billion will be spent on policy administration this year.

A significant portion of the increase in investment spending by insurance companies over the next several years will go toward outsourcing various activities.

TowerGroup projects the use of outsourcing by insurers to rise from $5.6 billion in 1999 to $7.45 billion in 2002, a 7.4% compound annual growth rate. Internal investment, meanwhile, will increase by 1.4%, from $6 billion to $6.35 billion, a compound growth rate of 1.4%.

Outsourcing surges

The jump in spending on outsourcing is partly due to insurers' experience fixing their year 2000 computer problems, Roby says. Insurers found they couldn't do all of the remediation efforts internally and had to seek outside help.Successful Y2K remediation efforts resulted in insurance carriers developing a comfort level with the skills provided by outside product and service providers and has encouraged insurers to continue to use them.

TowerGroup's figures also show that insurance companies are moving from mainframe to client/server solutions. In 1999, carriers spent $3.7 billion on mainframe services, software and hardware and $1.9 billion on client/server technology.

By 2003, however, mainframe investments should climb to $4.2 billion, a $600,000 increase, compared with $3.3 billion, a $1.4 billion increase in client/server technology, according to TowerGroup.